Avoiding a hard landing for euro economy isn't rocket science

Europe can achieve great success when it tries. The European Space Agency has just managed to plant a robotic lander on a tiny comet after a four billion mile journey through space. It’s a scientific achievement that could help us unlock some of the deepest secrets of the universe.

European economic policymakers on the other hand cannot hit a barn door with a shotgun. That means the odds of a hard landing for the euro zone economy are rising, not falling some six years after the global financial crisis first erupted.

Policymakers appear paralyzed by the after-effects of 2008-2009 crisis and 2011-2013 twin recessions. Weak economic confidence, high unemployment, grueling fiscal austerity policies and growth-sapping debt deflation are big problems, but they are not insoluble.

If Europe’s politicians had the same kind of focus as their top scientists, it’s hard to believe that we’d have suffered the half-hearted and mis-directed reflation efforts that have kept the euro zone economy at a standstill and made a slide into deflation seem inevitable.

Euro zone GDP growth squeezed a meagre 0.2 per cent rise in the third quarter after a 0.1 per cent increase in the previous period. Without another major push, the economy could be bouncing along the bottom of recession for years.

The bloc’s largest economies, Germany and France, were spared an embarrassing plunge into triple-dip recession, but only by a small margin and they are not out of danger yet. Italy has not been so lucky. It is suffering its third recession in six years and deepening its economic plight in the process.

Some of the former euro zone crisis countries have fared better, especially Ireland, Spain and Greece, but this will be short-lived unless the Big Three core economies can achieve a growth orbit that is not at perpetual risk of decay.Stronger euro zone growth though is not going to happen unless policymakers do something much more substantive to fuel the recovery. The key building blocks for recovery – stronger consumption, increased investment, greater stock-building, more government spending and faster trade growth – have all been badly damaged and it is up to politicians to fix them.

Unfortunately, the political boffins seem stuck in denial, relying on a stubborn belief that recovery will spontaneously self-start at some stage soon. Considering the dismal economic backdrop at home and the wider international economy, the chances of that happening without official intervention are remote.

Without a plan for radical action soon, European Central Bank forecasts for 1.5 percent economic growth next year look highly improbable, and the chances of another recession look a much more likely possibility.

On the monetary side, the ECB needs to get its skates on for a speedy launch of quantitative easing (QE) – printing money to fund mass purchases of euro zone government bonds that will allow credit to be pumped into the economy to get the recovery’s vital life-signs working again.

The longer the ECB delays QE, the harder it will be contain recession and deflation once they break out again. In the long run, the cost of prevention will be much cheaper than the political cost of a possible future EMU break-up.

A return to expansive German fiscal policy could also boost demand for consumer and investment goods from abroad, lifting global growth prospects. Germany is, after all, the largest surplus economy in the world.

Putting the euro zone economy back on a clear growth trajectory will be an epic journey. Like every mission into the unknown, it needs brilliant organisation and enterprising ideas to help it on its way. Without it, the euro zone recovery could end up lost in space.

Reprinted courtesy of the South China Morning Post 17th November 2014